Are We Ignoring The Counter View On Five Prime?

Summary

The field of FGF inhibitors in which it is working is not an easy area.

It will be competing with larger pharmaceuticals that have large resources and are also ahead in the race.

Accumulated losses of $144.3 million – further stock dilution expected.

The market seems to be responding without proper attention to the negatives.

Five Prime Therapeutics (NASDAQ:FPRX) started trading as a listed company on September 18, 2013 after raising $62 million through an IPO of 4.8 million shares at $13 a share. On February 6, 2014, the company announced pricing of its underwritten public offering of 3 million shares of common stock at a price of $12.50 a share. The underwriters were granted the option of purchasing 450,000 additional shares at the offer price. The underwriters eventually exercised that option in full.

All shares were offered by the company and none by any existing shareholder. GlaxoSmithKline (NYSE:GSK) has a 4.7 percent stake in Five Prime while Pfizer (NYSE:PFE) holds 10.1 percent.

Pipeline

Five Prime focuses on discovery and development of novel proteins therapeutics - antibodies or drugs developed from protein fragments used for blocking disease processes. Using its proprietary platform, the company has been able to identify numerous targets out of its library of 5,600 protein fragments, or extracellular proteins, developed by it over the years. Currently, the company's pipeline comprises of three candidates, one each for multiple solid tumors, autoimmune disease, including rheumatoid arthritis and gastric cancer. FP-1039, the candidate for solid tumors, is in Phase Ib trial.

The drug is being developed in collaboration with GlaxoSmithKline, which holds the license for development and commercialization in the U.S., Canada and EU. GlaxoSmithKline is committed to pay up to $435 million in milestone payments for the drug. Five Prime has another ongoing partnership with UCB Pharma S.A.

FPA008, in early Phase I study, intends to prevent the same inflammatory factors as AbbVie's blockbuster rheumatoid arthritis treatment, Humira. However, the company claims that it is potentially more effective.

FPA144 is still in preclinical stage and being developed for treatment of gastric cancer and other solid tumors.

Stock performance

The success of the company's IPO was primarily attributed to its proven development platform, which the company believes will continue providing it with collaborative funding opportunities.

However, the stock gained 0.6 percent and achieved a 52-week high of $21.68 in mid January 2014 after dipping to a low of $8.02 in mid November 2013. The stock is currently valued at $15.16, while the recently announced unwritten offer is priced at 50 cents below the IPO price.

Counter thesis

The company's lead product FP-1039 intends to inhibit selective fibroblast growth factor (FGF) receptors. FGFs are heparin-binding proteins that have critical and multiple developmental functions. The FGF/FGFR pathway has been demonstrated to mediate cell proliferation, motility, migration and survival. However, there is yet a lot to be understood about the methodology of their mechanisms. Unless that is accomplished it would be difficult to cross hurdles such as access to targets, resistance to therapy, complexity of biological systems and individual variations.

Moreover, one may not question the identification of targets using the company's proprietary platform but there is a question mark on the validation of targets as those have been validated in rodent models, something that is not totally dependable. At the time of the IPO, one doctor was quoted as saying, "You can do almost anything with mice." That means, validation of targets identified using rodent models requires prerequisites. There is a difference between what can happen in mice and what does not happen in humans. The path from "preclinical arena to the clinic has often been fraught with challenges, with striking results in mouse models not reaching commensurate success in humans." In the end, the difference between the "number of genes altered in mouse models and human cancers highlight the difference between what can happen in mice and what does happen in humans."

Five Prime will have to compete with Big Pharma, which is also actively involved in studying FGFR inhibitors.

Novartis (NYSE:NVS) has two in the pipeline - both BGJ398 and Dovitinib are FGF inhibitors and in Phase II trials for solid tumors and renal cell carcinoma respectively. EliLilly (NYSE:LLY) has LY-2874455 for which participants are being recruited for studying dose escalation and dose confirmation in patients with advanced and metastatic cancer. AstraZeneca's (NYSE:AZN) AZD4547 is in Phase IIa study for treating patients with breast cancer dependent on a specific FGF receptor protein.

Going forward, the company is likely to face funding issues. Five Prime has accumulated huge losses since 2002 - at the time of its IPO the figure stood at $144.3 million. The September 2013 $62-million IPO was for funding Phase I trials of FPA008 ($10 million) and FPA144 ($20 million) and likely to last until the beginning of or mid 2015. Accumulated loss is different from cash loss. It is the negative balance that you see in the "retained earnings" row of a balance sheet. A company must necessarily earn that much first before it becomes a profitable company.

While the recent $43.13 million underwritten stock offer of February 2013 has diluted shareholder value, its purpose is not fully known as it is not mentioned when the pricing was announced nor the closure of the offer.

Conclusion

Losses and valuations mean pretty little in biotech stocks - it is all about potential. The only potential here is GlaxoSmithKline and Pfizer's stake but for companies that size, ten or twenty million dollars make little difference.

The appetite for biotech stocks is probably why the IPO and the latest stock offering was a success. In my view, Five Prime is a risky play and I would step aside and wait for some solid news on the efficacy of its pipeline drugs before investing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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